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So far, the still young second quarter is turning out unkind to investors, as stocks fell about 2% last week, a second consecutive loss.

Small-company shares took the brunt of the hit, a classic tell of the "risk off" trade returning. Investors saw both a flare-up in concerns about the European debt crisis—read Spain—and U.S. economic data decidedly less good than that seen in the first quarter.

The Dow Jones Industrial Average fell 1.6%, or 211 points, to 12,849.59, and the Standard and Poor's 500 index lost 2%, or 28, to 1370.26. The Nasdaq Composite dropped about 2.3%, or 69 points, to 3011.33. The small-cap Russell 2000 index dropped 2.7% to 796.29

It was partially normal profit-taking on the S&P's strong 12% rise in the first quarter, says Darren Chervitz, research director at Jacobs Asset Management. But investors are watching the worrisome signs across the Atlantic, where Spanish bond prices fell sharply last week.

"This is going to be the nature of the beast" for the summer, he predicts, with pockets of quiet interrupted by worries about other parts of the world. Spain could be this summer's Greece, he adds.

Great Wolf Resorts
(ticker: WOLF) continues to draw interest. The bidding war between KSL Capital Partners and
Apollo Global Managementapo 2.485114690092728%Apollo Global Management LLC Cl AU.S.: NYSEUSD20.9992
0.50922.485114690092728%
/Date(1481307782873-0600)/
Volume (Delayed 15m)
:
688196
P/E Ratio
16.95967741935484Market Cap
3800485070.00427
Dividend Yield
6.657156443176414% Rev. per Employee
1633250More quote details and news »apoinYour ValueYour ChangeShort position
(APO) escalated last week, with KSL's $7 per share bid for the hotel/water park topping Apollo's previous $6.75 offer. Several parties took a look at Great Wolf last year, and at least one other entity is said to be mulling a bid. There's probably a better than 50/50 chance of a third offer. (See The Activist Spotlight, under 13D Filings.)

In general, bullish sentiment seems at a low ebb this year, and with the U.S. election not until November, the stage seems set for stasis at best until the fall.

At worst, there are the traditional summer blues. "Sell in May and go away" is a market cliché but there's powerful history behind it. (See chart below.)

According to Bespoke Investment Group, since the end of World War II, $100 invested in the S&P 500 index only in the October-April periods yielded $9,329, versus $99 in the May-September periods.

Only the most hard-core investor could wish Labor Day was here already.

THIS COLUMN TOOK A SKEPTICAL VIEW on Oct. 3 of the then-$29 share price of
Westport Innovations
(WPRT), which makes natural-gas combustion systems for truck engines. The potential negatives noted then—congressional rejection of subsidies for those engines and big new competitors entering the market—have come to pass.

That, however, hasn't stopped the stock from skyrocketing. Shares of the Vancouver, British Columbia-based company rose to $50 on March 21 before settling back to $37.63 on Friday, still much higher than when our downbeat view was published.

Over the winter, the drop in natural-gas prices to decade lows fueled the idea that truck owners will eventually switch to natural gas from diesel. That has boosted the stock. Westport has a 50/50 joint venture with diesel-engine maker
Cumminscmi -1.2275698984559744%Cummins Inc.U.S.: NYSEUSD142.015
-1.765-1.2275698984559744%
/Date(1481307822158-0600)/
Volume (Delayed 15m)
:
478922
P/E Ratio
20.53545586107091Market Cap
24194578417.0227
Dividend Yield
2.8893587033121917% Rev. per Employee
322265More quote details and news »cmiinYour ValueYour ChangeShort position
(CMI), called Cummins Westport, to adapt Cummins engines in sizes from 5.9 to 12 liters to run on natural gas. This profitable division is the bulk of parent Westport Innovation's business, and in 2011, some 5,500 engines were retrofitted.

Yet the reasons to remain skeptical of Westport's stock price are perhaps stronger now than ever.

The drop from 50 came after Cummins and
Navistarnav -2.0755305867665417%Navistar International Corp.U.S.: NYSEUSD31.375
-0.665-2.0755305867665417%
/Date(1481307788504-0600)/
Volume (Delayed 15m)
:
120918
P/E Ratio
N/AMarket Cap
2615040673.47839
Dividend Yield
N/ARev. per Employee
592778More quote details and news »navinYour ValueYour ChangeShort position
(NAV), another maker of diesel truck engines, said they will begin making natural-gas-fired engines. On March 21, Cummins announced it will begin producing a 15-liter engine, for big 18-wheelers, by 2014. That will compete with Westport Innovations' own 15-liter engine, which isn't included in the CWI joint venture.

While this can be viewed as a validation of natural gas as truck fuel in the future, little Westport will now be competing with two of the best and biggest engine makers in the business. The near-term demand for engines fired by natural gas still appears too small for Westport to compete with rivals that have much higher research and capital resources, not to mention high credibility.

Perhaps more important, on Feb. 20, the President's Day holiday in the U.S., Westport announced that its CWI agreement was amended to allow Cummins to go it alone outside North America on natural-gas-fired 5.9-12 liter medium-duty engines. Previously, CWI had a global agreement.

These changes aren't good news for Westport, which isn't expected by most analysts to make a profit until 2014. In the nine months ended Dec. 31, revenue rose sharply to US$227 million from $148 million in the 12 months ended March 31, 2011. (Westport is changing to a calendar year.)

But gross margins fell to 36% from 39%. Margins and prices could come under more downward pressure long-term if Cummins and Navistar, for example, can bring competitive and cheaper products to market.

Even with a shorter year in 2011, Westport losses widened to nearly $46 million from $42 million. The per-share loss narrowed to 96 cents from $1 only because shares outstanding jumped 13% to 49.3 million. That share count has gone even higher, after a February offering of 6.325 million shares at $43.25, bringing shares outstanding to about 55 million. With the stock at $37.63, the new shareholders can't be very happy.

Parent Westport's losses continue to grow, even as its CWI joint venture becomes more profitable, notes analyst Jason Zandberg of PI Financial in Vancouver. Zandberg, who has a Sell rating on the stock, doesn't expect Westport to break even until 2014.

"Westport hasn't had a problem getting capital to spend, but they have had an issue of getting a return on capital," he says. "I don't know how long that can go on." The company hasn't made a dime of profit since going public in 1997. "They have to generate a profit sooner or later," the analyst adds.

Westport spokesman Darren Seed responds that over the next two years the company will have various new revenue streams from light-duty to heavy-duty engines. That should give its various businesses positive earnings before interest, taxes, depreciation, and amortization, he adds. Also, the bulk of the losses come from necessary investment and from research-and-development spending. As for the 15-liter engine competition, he says Westport's combustion technology is state of the art, "like Dolby Sound."

The way things look, it's still a good bet those profits will come later than investors expect. Westport was overvalued in October and is even more so now.

That huge short interest exists for several reasons. Some of the negative forces that brought its British rival to its knees are also at work on GameStop—and any retailer, for that matter.

The bear case is simple: Internet-distribution models, such as sales through
Amazon.comamzn 0.04756753938983228%Amazon.com Inc.U.S.: NasdaqUSD767.695
0.3650.04756753938983228%
/Date(1481307803884-0600)/
Volume (Delayed 15m)
:
1090156
P/E Ratio
175.78764062965425Market Cap
364609896235.764
Dividend Yield
N/ARev. per Employee
554562More quote details and news »amzninYour ValueYour ChangeShort position
(AMZN) and digitalization—that is, downloadable or streaming-games content, much of it free—will eat GameStop's lunch eventually. For example, hardly anyone goes into a retailer to buy airline tickets and music anymore. Why go to GameStop to buy a $40 game, when it's cheaper on Amazon or there are free games to be had, like Angry Birds?

Another comparison bears make is to retailers like BlockBuster and
Best Buy bby -0.7503548975866964%Best Buy Co. Inc.U.S.: NYSEUSD48.94
-0.37-0.7503548975866964%
/Date(1481307823075-0600)/
Volume (Delayed 15m)
:
1721557
P/E Ratio
14.698174588830652Market Cap
15474759937.2
Dividend Yield
2.295317143149913% Rev. per Employee
316352More quote details and news »bbyinYour ValueYour ChangeShort position
(BBY). After a poor fourth quarter, Best Buy recently announced plans to close 50 big-box stores and reduce square footage. GameStop's 12% share drop this year has underperformed both the market, up 9%, and Best Buy, down 6%.

Despite this, however, the short position is probably overdone, and new bears might pause before jumping in. At $21.23, this isn't a stock trading at nosebleed triple- or double-digit valuation multiples. The price/earnings ratio for calendar 2012 is a modest 6.6 times consensus analysts' estimates of $3.21 a share, up from $2.87.

Over the past three years, GameStop has been solidly profitable and showed little damage from the Great Recession. It has no debt, and nearly $5 a share in cash, and the game-console cycle is in a lull that will end in a year or two.

The short position is almost "theological," quips Mark Schultz, a bullish portfolio manager at MTB Investment Advisors. "This isn't a broken business model," and five years ago the shorts were saying this company would disappear, adds Schultz, who's been accumulating shares lately.

BlockBuster,
Wal-Mart Storeswmt -0.48336650554449817%Wal-Mart Stores Inc.U.S.: NYSEUSD70
-0.34-0.48336650554449817%
/Date(1481307823753-0600)/
Volume (Delayed 15m)
:
3923575
P/E Ratio
15.21304347826087Market Cap
216168169224.158
Dividend Yield
2.857959416976279% Rev. per Employee
210427More quote details and news »wmtinYour ValueYour ChangeShort position
(WMT) and Amazon were all supposed to take away GameStop's used-games business, but that hasn't happened, he says. Nearly 50% of GameStop's profit comes from the used-games business, and hard-core gamers are its main customers, Schultz adds. As for the download threat, even mediocre games take hours to download, he says.

This is a company where free cash flow rose from $300 million in 2008 to $460 million in the January-ended 2012 year. With no debt and all the cash going to buying back stock, GameStop is a good leveraged- buyout candidate, he opines. That must be a scary thought for the shorts.

The idea that over the long term, game distribution will increasingly migrate to the Internet and mobile applications from physical stores is hard to argue with, but the endgame seems pretty far away. It won't take much of a bullish surprise in the next quarter or two to fuel a decent short-covering rally.

Bad Roller Coaster

The Dow fell 1.6% in an up-and-down week, with investors fretting about Europe again. Hewlett-Packard jumped 6%, but Bank of America fell 6%.